“The rally is justified as Vietnam has defied its skeptics
and maintained relatively tight monetary policy,” said Edwin Gutierrez, a London-based portfolio manager who helps oversee
about $8 billion of emerging-market debt at Aberdeen. “Many
market participants expected them to slip up in favor of their
erstwhile pro-economic growth bias.”

The government rolled out its so-called Resolution 11
strategy to tame prices, restrain credit growth and stabilize
the currency in February 2011, limiting its ability to support
the economy as Europe’s debt crisis curbed exports. The dong has
strengthened 0.8 percent so far in 2012, after sliding 26
percent in the last four years. Inflation (VNCPIYOY) moderated to 14
percent in March from 23 percent in August and Gutierrez
predicts the rate will fall below 10 percent this year.

Bond Risk

Five-year credit-default swap contracts on Vietnam’s debt
dropped 124 basis points this year to 285 as of April 3,
according to data provider CMA, which compiles prices quoted by
dealers in the privately negotiated market. The contracts insure
debt against non-payment, and traders use them to speculate on
credit quality.

The contracts reached 272 on March 19, the lowest level
since Standard & Poor’s and Moody’s Investors Service cut their
Vietnam credit ratings in December 2010. Vietnam is rated BB- at
S&P, three levels below investment grade, and assessed as B1 by
Moody’s, the fourth-highest junk grade. The cost of insuring
Vietnam’s debt using credit-default swaps is cheaper than that
for Spain and Italy, both of which are rated investment grade.

Vietnam’s bonds are also in demand this year as higher-
yielding securities will probably be least affected by rising
Treasury yields as the U.S. economy improves, said Sergey Dergachev, a senior portfolio manager in Frankfurt at Union
Investment.

‘Good Hedge’

“Vietnam is a good hedge for me against a possible rise in
U.S. Treasury rates,” he said. “Vietnam historically, and also
as a high-yield credit, is less susceptible to movements of U.S.
Treasury yields than Philippine and Indonesian debt.”

Vietnam’s 6.75 percent dollar bonds due January 2020 yield
326 basis points, or 3.26 percentage points, more than similar-
maturity U.S. Treasuries, while the yield premiums for the
Philippines’ 6.5 percent debt due January 2020 and Indonesia’s
5.875 percent notes due March 2020 are at 146 basis points and
170 basis points, respectively, according to data compiled by
Bloomberg.

The yield on 10-year Treasuries increased 38 basis points
this year to 2.26 percent, after sliding 141 basis points in
2011.

Vietnam’s trade gap narrowed as slower lending growth
curbed demand for imports. The trade deficit was $150 million in
March, down from $279 million in February, preliminary figures
from the statistics office showed on March 28.

Rising Reserves

Slower inflation limited domestic demand for foreign
currency, easing pressure for the dong to devalue and giving the
central bank room to bolster its foreign-exchange reserves. The
State Bank of Vietnam purchased a “large amount” of foreign
currency in 2012, boosting reserves by 20 percent from the end-
2011 level, Governor Nguyen Van Binh told reporters in Hanoi on
March 6. The holdings increased 50 percent last year, Binh said,
without giving the total.

The State Bank of Vietnam’s daily reference rate was 3 dong
stronger than the offshore fixing set by the Association of
Banks in Singapore today, compared with a gap of 396 dong at the
end of last year. The currency dropped 0.4 percent to 20,908 per
dollar at 2 p.m. today in Hanoi, according to data compiled by
Bloomberg.

‘Good Progress’

“Since they enacted Resolution 11, they have made very
good progress in stabilizing the economy,” said Christian de Guzman, a Singapore-based assistant vice president at Moody’s.
“More importantly, they have stemmed capital flight. Vietnam’s
residents aren’t running to the dollar any more, or running to
gold as fast as they did previously.”

Still, Moody’s is maintaining its negative outlook on
Vietnam’s rating as the government still has to fix the nation’s
weak banking system, De Guzman said.

The bad-debt ratio at Vietnam’s commercial banks was
predicted by central bank Governor Binh in November to reach as
high as 3.8 percent in December from 3.3 percent the previous
month. The level may exceed official figures by as much as four
times, Fitch Ratings said in a report on March 7, as it warned
bank asset quality may deteriorate further and the government’s
capacity to absorb bad debts is unclear.

“This remains the biggest risk to the credit and would be
abetted if the banks were willing to accept foreign injections
of capital,” said Aberdeen’s Gutierrez. “We do not under-
estimate the challenges that remain in light of the future
capitalization requirement of the financial system.”

Restored Confidence

Dung sought to cut the credit-growth target to below 20
percent for 2011 from 23 percent, and reduce it further to as
low as 15 percent this year. Policy makers raised the benchmark
refinancing rate to 15 percent from 9 percent at the beginning
of 2011, before lowering it to 14 percent on March 12.

Vietnam’s economy expanded 4 percent in the first quarter
from a year earlier, the slowest pace since 2009, the General
Statistics Office reported on March 29. Gross domestic product
may climb 6 percent this year and 6.6 percent in 2013, according
to the median estimates of economists surveyed by Bloomberg.

“The policies are bearing fruit and this should be
reassuring to foreign investors,” said Takahide Irimura, the
head of emerging-market research in Tokyo at Kokusai Asset
Management Co. “I would still like to see some discipline going
forward so that they don’t try to stimulate the economy
aggressively.”

Kokusai, which oversees $45 billion of assets globally,
owned Vietnam’s dollar bonds maturing in 2016 and 2020 in its
Asia Pacific Sovereign Open fund, according to data compiled by
Bloomberg.